Vijaya Diagnostic Centre Limited's (NSE:VIJAYA) 30% Share Price Surge Not Quite Adding Up

The Vijaya Diagnostic Centre Limited (NSE:VIJAYA) share price has done very well over the last month, posting an excellent gain of 30%. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Vijaya Diagnostic Centre may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 20x, when you consider almost half of the companies in the Healthcare industry in India have P/S ratios under 4.1x and even P/S lower than 1.7x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Vijaya Diagnostic Centre

What Does Vijaya Diagnostic Centre's P/S Mean For Shareholders?

Recent times have been advantageous for Vijaya Diagnostic Centre as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Vijaya Diagnostic Centre.

How Is Vijaya Diagnostic Centre's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Vijaya Diagnostic Centre's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. Pleasingly, revenue has also lifted 40% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 23% during the coming year according to the seven analysts following the company. With the industry predicted to deliver 26% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Vijaya Diagnostic Centre's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Vijaya Diagnostic Centre's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see Vijaya Diagnostic Centre trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Vijaya Diagnostic Centre with six simple checks.

If these risks are making you reconsider your opinion on Vijaya Diagnostic Centre, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.